Interest rate decision could have a big impact on Norway's weak krone
Norway's central bank will decide on Thursday how much it will raise the key policy rate by. The decision could prove very impactful for the struggling Norwegian krone.
The Norwegian krone is at historic lows compared to other major currencies like the euro and dollar. One of several factors that analysts have pointed to is the interest rate differential.
This is the difference in the key policy rate in countries. For example, the key interest rate in Norway is 3.25 percent, compared to 5-5.25 percent in the US and 3.75 percent in the eurozone.
Lower interest rates make Norway a less attractive proposition for investors. The currency is also affected by low gas and oil prices, economic uncertainty and the central bank pursuing a free-floating exchange rate policy.
On Thursday, the central bank, Norges Bank, will make an interest rate decision. Analysts are currently split on whether the key policy rate will be raised by 0.25 or 0.5 percentage points.
"Expect extremely high volatility. It's going to be a rollercoaster," currency strategist at Nordea, Dane Cekov, told E24. Cekov believes that Norges Bank will choose a double interest rate hike.
"We lean in that direction. The consequence of an increase of 0.25 (percentage points) is a weaker krone, higher inflation for longer, and a higher interest rate peak. A weaker krone exchange rate and higher inflation will also contribute to higher economic activity. Norges Bank wants to curb activity," he said.
He added that the weaker krone had a big impact on inflation as imported goods became more expensive. The currency strategist said that a third of inflation is imported.
Nils Kristian Knudsen, a currency strategist for Handelsbanken, also expects a hike of 0.5 percentage points.
"We have a forecast where we envisage 0.5 percentage points. When it comes to the reaction, if that is the outcome, we basically believe that it may contribute to the krone strengthening a little," he told E24.
Knudsen said that a euro could cost as much as 12 kroner again if the bank only raises the key policy rate by 0.25 percentage points.
Comments
See Also
The Norwegian krone is at historic lows compared to other major currencies like the euro and dollar. One of several factors that analysts have pointed to is the interest rate differential.
This is the difference in the key policy rate in countries. For example, the key interest rate in Norway is 3.25 percent, compared to 5-5.25 percent in the US and 3.75 percent in the eurozone.
Lower interest rates make Norway a less attractive proposition for investors. The currency is also affected by low gas and oil prices, economic uncertainty and the central bank pursuing a free-floating exchange rate policy.
On Thursday, the central bank, Norges Bank, will make an interest rate decision. Analysts are currently split on whether the key policy rate will be raised by 0.25 or 0.5 percentage points.
"Expect extremely high volatility. It's going to be a rollercoaster," currency strategist at Nordea, Dane Cekov, told E24. Cekov believes that Norges Bank will choose a double interest rate hike.
"We lean in that direction. The consequence of an increase of 0.25 (percentage points) is a weaker krone, higher inflation for longer, and a higher interest rate peak. A weaker krone exchange rate and higher inflation will also contribute to higher economic activity. Norges Bank wants to curb activity," he said.
He added that the weaker krone had a big impact on inflation as imported goods became more expensive. The currency strategist said that a third of inflation is imported.
Nils Kristian Knudsen, a currency strategist for Handelsbanken, also expects a hike of 0.5 percentage points.
"We have a forecast where we envisage 0.5 percentage points. When it comes to the reaction, if that is the outcome, we basically believe that it may contribute to the krone strengthening a little," he told E24.
Knudsen said that a euro could cost as much as 12 kroner again if the bank only raises the key policy rate by 0.25 percentage points.
Join the conversation in our comments section below. Share your own views and experience and if you have a question or suggestion for our journalists then email us at [email protected].
Please keep comments civil, constructive and on topic – and make sure to read our terms of use before getting involved.
Please log in here to leave a comment.